Could the defensively oriented nature of consumer staples, as well as improved fundamentals for the sector, make it an outperformer if the US market were to see volatility late in 2020, perhaps related to US elections or geopolitical events?
“Speaking to fundamentals, I’ve recently seen better sales volumes, declining costs, and attractive valuations in consumer staples, making me optimistic looking ahead,” says Ben Shuleva, portfolio manager of Fidelity® Select Consumer Staples Portfolio (FDFAX).
According to Shuleva, sales across many consumer staples categories rose when the US and many other countries asked people to shelter at home. Sales growth subsequently flattened over the summer, before stabilizing at an above-average level, with many brands benefiting from an increase in at-home consumption.
At the same time, he says, lower oil prices reduced production costs for makers of many consumer products—from dish detergent to shampoo—while lower pulp prices reduced input costs for paper products ranging from toilet paper to diapers.
Promotional costs also are down across the industry, Shuleva says. There’s no need for companies to run 2-for-1 specials or offer many coupons when demand is exceeding supply. A combination of growing volume and lower costs could result in better profit margins, he suggests.
In addition, staples stocks lagged cyclical sectors early in 2020, especially in the second-quarter market recovery. As a result, some well-known companies in the sector are trading at attractive prices, Shuleva says.
As of September 30, the fund held a substantial position in market giant Procter & Gamble (PG), which Shuleva says saw a meaningful decline in its year-over-year raw material costs for the first half of 2020. He also maintained an outsized stake in Coca-Cola (KO), the portfolio’s No. 2 holding.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
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